In a second report, the department said new orders for long-lasting manufactured goods increased 0.5 percent in February, rising for the third straight month, and January's figures were revised higher to show a 3.9 percent gain.

Markets had expected orders to climb 0.7 percent in February from the previously reported 2.6 percent rise.

The housing data came on the heels of report on Tuesday showing existing home sales fell for a third straight month in February while the supply of houses on the market jumped.

Analysts said snowstorms that lashed parts of the country last month contributed to the drop in new home sales, but acknowledged the underlying trend remained weak.

U.S. financial markets were little moved by the mixed economic data, looking elsewhere for direction. The downgrading of Portugal's credit rating handed the Standard & Poor's 500 index and the Dow Jones industrial average their biggest one-day drop in a month.

The U.S. dollar scaled a 10-month high against the euro. Benchmark government bond yields jumped to their highest level in more than a month after an auction of five-year Treasury notes attracted poor demand. The rise will likely push up mortgage rates and complicate the housing recovery.

Home sales have barely responded to the extension and expansion of a popular tax credit, which boosted purchases in the second half of 2009. Housing is showing weakness just as a key pillar of support is about to be dismantled.

The Federal Reserve will end purchases of mortgage-based securities next week, which had lowered the cost of home loans to record lows and helped the housing market claw out of a three-year slump.

SPRING REVIVAL EYED

Still, analysts are hoping a last minute rush by buyers to qualify for the extended tax credit before its June expiration could lift sales in the coming months. An anticipated pick up in employment is also expected to support future sales.

New-home sales are likely to pick up this month. In the second half of this year, demand drivers of housing should improve as the job market stabilizes and begins to add jobs, said Celia Chen, a senior director at Moody's Economy.com. in West Chester, Pennsylvania.

The prospect of more foreclosures flooding the market, however, will keep improvements in the housing market very modest through the rest of this year.

Home-builder Lennar Corp also struck cautiously optimistic note on the housing market and said it was on track to make a profit this year.

A report by the Mortgage Bankers Association showed U.S. mortgage applications fell for a second straight week, with demand for home loan refinancing sinking to its lowest level in a month as interest rates jumped.

While the housing market is still struggling, manufacturing continues to expand as businesses rebuild inventories.

Manufacturing is leading the economy's recovery from its worst downturn in seven decades. Durable goods inventories last month posted their biggest gain since December 2008.

Durable orders data provide further evidence that manufacturers are enjoying a healthy recovery, driven by restocking and the turnaround in world trade, said Paul Dales, a U.S. economist at Capital Economics in Toronto.